Oct 12, 201712:25 PMFinancial Perspectives
with Michael Dubis, CFP
Known vs. unknown and deep vs. shallow risks
(page 2 of 2)
This is a risk that already occurred and is now mostly priced into the markets. Much of the damages will not be covered by insurance. This is a tragedy of life and environment, while it is also a serious loss of wealth. A deep, unrecoverable risk has been experienced for many.
The unknowns, though, remain. They include the fact that so many people did not have adequate insurance, and the flood program combined with government funding will likely not be sufficient to return to par for many folks in Houston. This is a true destruction of wealth that cannot be replaced. Charity is one of the few sources of recovery for those impacted.
This is also already a tragedy of life, environment, and property with more to come. This is a known risk combined with unknown. This is a deep and shallow risk, as well.
The pricing of risk is tied to insurance primarily. Insurance will most certainly take a deep hit, though markets can price this exposure. What they can’t price is the level of potential destruction beyond insurable property and to the loss of life, environment, and productivity. Again, charity is one form of help.
Destruction of this magnitude is a combination of shallow and deep risks, with the deep very difficult to recover from. The extent of the destruction is also an unknown, impossible to fully price. We learn of it after the impact and for years to come. Markets price in that “learning” as it happens. Both hurricanes will remind us a lot about shallow and deep risks, both known and unknown.
We can’t prevent a hurricane or war, but we can be prepared for it both in body, mind, and in our action plans.
We can also give to those who experience the deep risks. Most people simply cannot fully recover from a deep-risk event. I strongly encourage charity at a time like this.
MICHAEL DUBIS is a fee-only CERTIFIED FINANCIAL PLANNER™ and president of Michael A. Dubis Financial Planning, LLC. He previously served as lecturer at the University of Wisconsin Business School James A. Graaskamp Center for Real Estate. Mike can be reached at firstname.lastname@example.org.
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